Energy Efficiency Tax Deductions: Hidden Gem for Commercial Properties?

Retrofitting commercial properties with energy-efficient equipment -- lighting, HVAC and energy management controls -- is a fairly straight-forward process. Equipment is upgraded, buoyed by utility company incentives and rebates. The reduced energy costs more than cover the cost of building improvements. And, as the building operates more efficiently, net operating incomes and asset values are bolstered. In short, reducing energy use is both the least expensive form of energy and one of the most lucrative investments a property owner can make.

Can it get better? Project financing -- oftentimes with no out-of-pocket costs for property owners; click here for information about Octus's program and other emerging solutions -- is catalytic, perhaps a game-changer. And, energy tax deductions are frosting on an already tasty cake. If your company builds, owns or leases commercial buildings, and you have installed or retrofitted the property to be more energy efficient, you may be eligible to deduct all or part of the costs associated with the installation or retrofit. Here's a summary from SourceCorp:

The EPAct §179D Tax Deduction provides a tax deduction of up to $1.80 per square foot for the installation of systems that reduce the total energy and power costs by 50 percent. Eligible building systems include interior lighting systems, heating, cooling, ventilation, hot water systems and building envelope systems.

To qualify for a full or partial deduction, the energy-efficient building property must meet the following criteria. The building:

• must have been placed in service after December 31, 2005.
• must be located in the United States.
• installation made is part of interior lighting systems, HVAC and hot water systems or the building envelope (insulation, exterior doors, exterior windows, roofing material).
• has been certified that installation will reduce total annual energy and power costs by 50 percent or more as compared to a reference building.
• energy and power consumption calculations are based on IRS-approved software programs that compare the subject facility to an ASHRAE Reference Building.
• must be certified by an IRS-qualified professional engineer or contractor licensed in the same jurisdiction as the proposed building.

"The most often overlooked tax benefit relative to the Energy Policy Act extension is the tax benefits construed for commercial building owners," said Julio Gonzalez, chief executive officer of Engineered Tax Services. "Real estate investors can now reduce the payback period in investing in energy-efficient components with the added benefit of deducting up to the entire expense of these assets immediately, versus depreciating these assets over 39 years. The Energy Policy Act of 2005 includes a tax deduction for investments in energy-efficient commercial building property designed to significantly reduce the heating, cooling, water heating, and interior lighting energy costs."

According to Gonzalez, Congress extended the energy tax benefits through 2013, and it may increase them from $1.80 per square foot to $3 per square foot later this year. A partial deduction of $0.60 per square foot is available for investments that reduce energy costs by 16 2/3% in one of three systems—lighting, heating and cooling, or building envelope.

Importantly, this is a tax deduction, and not a tax credit -- a tax credit is a dollar-for-dollar credit against your tax obligation, whereas a deduction reduces your gross income, and, therefore, will save you taxes as a percentage of the tax obligation.

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Post-script (29 Sept. 10): Thorough, blow-by-blow recap of 179D tax deductions in an article authored by Engineered Tax Services: Are Millions of Dollars Hiding in Your Buildings? Read on. It's real, viable and lucrative for CRE owners, managers, tenants and service providers to pursue and provision energy-efficiency upgrades.